OECD Review of Agricultural Policies China ORGANISATION FOR ECONOMIC CO-OPERATION AND DEVELOPMENT ORGANISATION FOR ECONOMIC CO-OPERATION AND DEVELOPMENT The OECD is a unique forum where the governments of 30 democracies work together to address the economic, social and environmental challenges of globalisation. The OECD is also at the forefront of efforts to understand and to help governments respond to new developments and concerns, such as corporate governance, the information economy and the challenges of an ageing population. The Organisation provides a setting where governments can compare policy experiences, seek answers to common problems, identify good practice and work to co-ordinate domestic and international policies. The OECD member countries are: Australia, Austria, Belgium, Canada, the Czech Republic, Denmark, Finland, France, Germany, Greece, Hungary, Iceland, Ireland, Italy, Japan, Korea, Luxembourg, Mexico, the Netherlands, New Zealand, Norway, Poland, Portugal, the Slovak Republic, Spain, Sweden, Switzerland, Turkey, the United Kingdom and the United States. The Commission of the European Communities takes part in the work of the OECD. OECD Publishing disseminates widely the results of the Organisation’s statistics gathering and research on economic, social and environmental issues, as well as the conventions, guidelines and standards agreed by its members. This work is published on the responsibility of the Secretary-General of the OECD. The opinions expressed and arguments employed herein do not necessarily reflect the official views of the Organisation or of the governments of its member countries. This document has been produced with the financial assistance of the European Union. The views expressed herein can in no way be taken to reflect the official opinion of the European Union. © OECD 2005 No reproduction, copy, transmission or translation of this publication may be made without written permission. Applications should be sent to OECD Publishing: [email protected] or by fax (33 1) 45 24 13 91. Permission to photocopy a portion of this work should be addressed to the Centre français d'exploitation du droit de copie, 20, rue des Grands-Augustins, 75006 Paris, France ([email protected]). FOREWORD Foreword T he Review of Agricultural Policies: China was undertaken as part of an initiative to provide analyses of agricultural policies for four major agricultural economies outside the OECD area, the others being Brazil, India and South Africa. The study examines the policy context and trends while measuring the extent of support provided to agriculture using the same method the OECD employs to monitor agricultural policies in OECD countries. In addition, it focuses on key interactions between China and OECD countries, including the economic impact of trade and agricultural policy reforms. The aim of the country study is to strengthen the policy dialogue with OECD members on the basis of consistent and internationally comparable analysis, and to provide an objective assessment of the opportunities, constraints and trade-offs that confront China’s policy makers. The study was carried out by the OECD Directorate for Food, Agriculture and Fisheries. The principal author was Andrzej Kwiecinski, who received valuable contributions from Stephen Apted (ABARE), Dirk Bezemer(University of Groningen), Fabrizio Bresciani(FAO), Brian Morrissey(Canadian consultant) and John Nash(World Bank) as well as from OECD staff members including Joe Dewbre, Hsin Huang, Wayne Jones, Wilfrid Legg, Pete Liapis, ClaudeNenert, StefanTangermann and Martin von Lampe. Research and statistical support were provided by Florence Mauclert, editorial support by Michèle Patterson, and technical and secretarial assistance by AnitaLari. The study benefited from the substantive input from Chinese experts. Data and policy information for the evaluation of the level of support was provided by Guoqiang Cheng from the Development Research Center of the State Council(DRC), and who also acted as the main contact and liaison person on all aspects of the study. Information on policy context and on the restructuring of the agro-food sector was provided by Xiande Li from the Institute of Agricultural Economics of the Chinese Academy of Agricultural Sciences(CAAS). Information on domestic and trade policies was provided by Tian Weiming from the College of Economics and Management of the China Agricultural University. This study benefited greatly from the support provided by the DRC, in particular the Department of Rural Economic Research led by Han Jun. The DRC experts as well as experts from the Ministry of Agriculture, Ministry of Commerce, Ministry of Finance, National Development and Reform Commission, State Administration of Grain and Chinese Academy of Sciences provided valuable comments on the draft report. This study was made possible through voluntary financial contributions by several OECD countries, in particular Australia and Canada as well as funding from the European Union. It was reviewed in a roundtable with Chinese officials and experts in Beijing in April2005. Chinese agricultural policies were examined by the OECD’s Committee for Agriculture at its 141stsession in June2005, bringing together policy makers from China, OECD member countries, and some non- OECD countries. This report is published under the authority of the Secretary-General of the OECD. Stefan Tangermann Director Directorate for Food, Agriculture and Fisheries OECD REVIEW OF AGRICULTURAL POLICIES – CHINA – ISBN 92-64-01260-5 – © OECD 2005 3 TABLE OF CONTENTS Table of Contents Highlights and Policy Recommendations ................................................................................... 9 1. Reforms and their impacts ................................................................................................ 11 2. Agricultural policy trends .................................................................................................. 17 3. The benefits of future policy reforms .............................................................................. 22 4. Policy challenges ................................................................................................................. 24 Chapter1.The Policy Context ......................................................................................................... 27 1.1. General aspects ............................................................................................................... 28 1.2. Agriculture’s importance to China’s economy ........................................................... 31 1.3. Structural change in the agro-food sector ................................................................... 36 1.4. The effects of economic reforms on China’s agriculture .......................................... 47 Chapter2.Policy Trends ................................................................................................................ 73 2.1. Agricultural policy framework ...................................................................................... 74 2.2. Domestic policies ............................................................................................................ 85 2.3. Trade policies ................................................................................................................... 110 2.4. Evaluation of support to Chinese agriculture ............................................................. 134 Chapter3.Policy Impacts ............................................................................................................... 149 3.1. Welfare impacts of trade and agricultural policy reforms ........................................ 150 3.2. The impact of liberalisation on Chinese agricultural commodity markets ............ 159 3.3. Domestic and world market implications of alternative grain stock estimates and trade policies in China ......................................................................... 166 Annex A. Labour Mobility and Rural Poverty in China ............................................................... 177 Annex B. Agricultural Policies and Support for Individual Commodities ............................... 189 Annex C. China’s Approach to Food Safety ................................................................................. 216 Acronyms and Abbreviations......................................................................................................... 226 List of Boxes 1.1. China’s political system ......................................................................................................... 29 1.2. Trade reform and factor mobility in China: the long and the short of it ....................... 35 1.3. The distribution of land rights across levels of authority ................................................ 40 1.4. Problems with Chinese agricultural statistics .................................................................... 51 1.5. Social security in rural China ................................................................................................ 61 2.1. The Agricultural Law of China .............................................................................................. 82 2.2. A brief history of the “peasant burden” .............................................................................. 99 2.3. Public debt funds in agricultural development .................................................................. 103 2.4. VAT assessment on imported agricultural products ........................................................ 118 2.5. Major WTO accession commitments by China–agricultural trade ............................... 123 2.6. OECD indicators of support to agriculture: definitions ..................................................... 134 2.7. China’s PSEs: what and how? ............................................................................................... 136 2.8. Transfer efficiency in agricultural support policies .......................................................... 142 3.1. The baseline projections for Chinese and world agricultural markets .......................... 160 A.1. The role of rural industries ................................................................................................... 180 OECD REVIEW OF AGRICULTURAL POLICIES – CHINA – ISBN 92-64-01260-5 – © OECD 2005 5 TABLE OF CONTENTS List of Tables 1.1. World top-10 countries by GDP (current USD), 2002................................................. 30 1.2. China: selected macroeconomic indicators, 1990-2003........................................... 30 1.3. Arable land and yields in selected countries, 2000-2002 average .......................... 36 1.4. Food industry in China between 1999 and 2003 ....................................................... 44 1.5. The composition of food industry and tobacco enterprises in China by type of ownership, 2002........................................................................................... 44 1.6. Agricultural machinery in China per 100 rural households, 1990-2003 ................ 49 1.7. Changes in the composition of the primary sector production, current prices, 1990-2003, % ....................................................................................... 53 1.8. China’s agricultural trade, 1992-2003 ........................................................................ 57 1.9. Relative labour productivity by sector, 1978-2001 .................................................... 59 1.10. Rural poverty in China, 1978-2003............................................................................... 60 1.11. Rural household incomes by source, 1985-2003 ....................................................... 61 1.12. Food consumption in China, 1990-2002 (kg/person/year) ....................................... 64 1.13. Shifts in energy sources in the Chinese diet, ages 20-45 ........................................ 65 2.1. Major laws and regulations in the agro-food sector ................................................ 83 2.2. Prices of electricity by different users in selected provinces in 2002 .................... 92 2.3. Rates of railway shipment for selected goods (since July 2000) ............................. 92 2.4. Comparison of water prices among different usages .............................................. 93 2.5. Annual interest rates of selected types of loans (%)................................................. 95 2.6. The rates of tax on special agricultural products–% of value ............................... 97 2.7. Agriculture-related taxes ............................................................................................. 98 2.8. Total national aggregate budgetary support to agriculture .................................... 110 2.9. Changes in MFN tariffs for basic commodities ........................................................ 115 2.10. China’s TRQ performance ........................................................................................... 124 2.11. Evolution of producer support (% PSE) and consumer support (% CSE) in China and selected countries, 1993-2004 ............................................................. 138 2.12. Total support to Chinese agriculture ......................................................................... 143 3.1. Tariffs levied and faced (%) ......................................................................................... 150 3.2. Welfare effects of multilateral policy reform, USD millions .................................. 151 3.3. The 2000 rural household survey frame .................................................................... 154 3.4. Structure of household income, provincial averages (% of total income) ............ 155 3.5. Consumption and poverty, provincial averages ...................................................... 156 3.6. Proportional welfare effects of price changes .......................................................... 157 3.7. Money metric welfare effects of price changes ........................................................ 158 3.8. Principal assumptions of the liberalisation scenarios ............................................ 162 3.9. Development of Chinese grain tariff rate quotas after WTO accession ............... 169 A.1. Rural poverty rates by region, China, 2002 ............................................................... 177 A.2. Comparison of income structure in rural areas, 2000 ............................................. 178 A.3. TVEs in China's economy, 1990-2002 ......................................................................... 180 A.4. Migrants and remittances ........................................................................................... 185 A.5. Duration of migration and remittances .................................................................... 185 B.1. Changes in grain prices (CNY/kg in current price) ................................................... 190 B.2. China’s WTO grain trade commitments ................................................................... 195 B.3. The state-set guidance prices for sugar beet and cane (CNY/tonne) .................... 200 B.4. China’s WTO sugar trade commitments ................................................................... 201 B.5. The state-set prices of cotton ..................................................................................... 204 B.6. China’s WTO cotton trade commitments ................................................................. 205 List of Figures 0.1. China’s agricultural trade, 1992-2004 ............................................................................ 15 0.2. Net trade in land and labour intensive agricultural commodities ........................... 15 0.3. Producer Support Estimate in China and selected countries, 2000-2003 average .. 20 0.4. Composition of Producer Support Estimate, 1993-2003 ............................................. 21 0.5. China’s Producer Support Estimate by commodity, 2000-2003 average .................. 21 0.6. Welfare gains (losses) by source of liberalisation ....................................................... 23 1.1. The share of agriculture in GDP, employment, total exports and imports, 1990-2003 ................................................................................................... 32 6 OECD REVIEW OF AGRICULTURAL POLICIES – CHINA – ISBN 92-64-01260-5 – © OECD 2005 TABLE OF CONTENTS 1.2. Agriculture’s share in GDP versus GDP per capita (2000-2002) ................................. 33 1.3. Agriculture’s share in employment versus GDP per capita (2000-2002) .................. 33 1.4. Regional distribution of agricultural labour and cultivated area, 2003 .................... 37 1.5. Nominal price indices, 1990-2003, 1990=100 .............................................................. 48 1.6. Chemical fertiliser use in China (active substance kg/ha of sown area), 1985-2003 49 1.7. Chemical fertiliser use in selected countries (active substance kg/ha of sown area), 2002 ................................................................ 50 1.8. Growth in Gross Agricultural Output, 2003 (1989-1991=100) ..................................... 50 1.9. GAO yearly growth rates in China, %, 1990-2003 ........................................................ 52 1.10. Output indices for main crops, 1990-2003, 1990=100 ................................................ 53 1.11. Total cereal production and nominal farm gate prices, 1993-2003 .......................... 54 1.12. Composition of the sown area, 1991 and 2003, % ....................................................... 55 1.13. Indices of livestock production, 1990=100 .................................................................. 55 1.14. Crop yields for selected crops, 1990-2003 ..................................................................... 56 1.15. Evolution of employment in Chinese agriculture, 1990-2003 .................................... 58 1.16. Rural household income per person, 1981-2004 .......................................................... 59 1.17. Wages and net incomes per person in peasant families across provinces, CNY, 2003 ........................................................ 62 1.18. Urban to rural per capita income and living expenditures ratios, 1978-2004 ......... 63 2.1. Central institutions with oversight over China’s agro-food sector .......................... 80 2.2. Comparison of different types of grain and soybean prices in China ...................... 86 2.3. Simple average MFN tariffs on agricultural products ................................................. 114 2.4. Dispersion of China’s agricultural tariffs in 2002 and 2004 ....................................... 116 2.5. China’s agricultural trade, 1992-2004 ............................................................................ 128 2.6. Net trade in land and labour intensive agricultural commodities ........................... 129 2.7. China’s main agro-food imports, 2003 .......................................................................... 130 2.8. China’s main agro-food exports, 2003 .......................................................................... 130 2.9. China’s agro-food exports (including fish and fish products) by region ............................................................................................................................ 131 2.10. Main export markets for Chinese agro-food products (including fish and fish products), 2003 ........................................................................ 132 2.11. China’s agro-food imports (including fish and fish products) by region ............................................................................................................................. 133 2.12. Main suppliers of agro-food products (including fish and fish products) to China, 2003 ........................................................ 133 2.13. Percentage PSEs for China and selected countries, average 2000-2003 ................... 139 2.14. Percentage PSE for crops and livestock products in China, 1993-2003 .................... 140 2.15. Composition of producer support estimate, 1993-2003 .............................................. 141 2.16. Total support estimate in China and selected countries, average2000-2003–as per cent of GDP ........................................................................ 143 2.17. Chinese % PSE by commodity, average 2000-2003 ...................................................... 144 2.18. Distribution of producer support by commodity, 2000-2003 average............................................................................................................. 145 3.1. Welfare gains (losses) by source of liberalisation ....................................................... 152 3.2. Changes in factor returns to agriculture and non-agriculture resulting from multi-sectoral reduction in trade protection 153 3.3. Chinese grain market developments: past and projections ...................................... 160 3.4. Development of Chinese meat production .................................................................. 161 3.5. Impact of 50% liberalisation on world crop markets, average 2005-2013 ................ 163 3.6. Impact of 50% liberalisation on Chinese crop markets, average 2005-2013 ............ 163 3.7. Recent developments in the Chinese grains balance, 1990/91-2003/04 ................... 167 3.8. Chinese total grain stocks: recent FAO revisions ........................................................ 168 3.9. Impact of Chinese grain stock revisions: import projections of wheat, coarse grains and rice .................................................. 169 3.10. Impact of restricted and extended import quota access on Chinese and world grain prices, average 2004-2013 .............................................. 170 3.11. Impact of restricted and extended import quota access on Chinese grain consumption, average 2004-2013 .................................................... 171 3.12. Impact of unlimited import quota extension on Chinese grain imports, 2002-2013 ............................................................................ 172 OECD REVIEW OF AGRICULTURAL POLICIES – CHINA – ISBN 92-64-01260-5 – © OECD 2005 7 TABLE OF CONTENTS 3.13. Self-sufficiency rates of Chinese grain markets, 1991-2013, in different scenarios 173 B.1. Percentage PSEs, producer and reference prices for wheat, 1993-2003 ................... 196 B.2. Percentage PSEs, producer and reference prices for maize, 1993-2003 .................... 196 B.3. Percentage PSEs, producer and reference prices for rice, 1993-2003 ........................ 197 B.4. Percentage PSEs, producer and reference prices for soybean, 1993-2003 ................ 199 B.5. Percentage PSEs, producer and reference prices for rapeseed, 1993-2003 .............. 199 B.6. Percentage PSEs, producer and reference prices for peanuts, 1993-2003 ................ 200 B.7. Percentage PSEs, producer and reference prices for sugar, 1993-2003 ..................... 202 B.8. Percentage PSEs, producer and reference prices for cotton, 1993-2003 ................... 206 B.9. Percentage PSEs, producer and reference prices for apples, 1993-2003 ................... 209 B.10. Percentage PSEs, producer and reference prices for beef and veal, 1993-2003 ....... 212 B.11. Percentage PSEs, producer and reference prices for pigmeat, 1993-2003 ................ 212 B.12. Percentage PSEs, producer and reference prices for sheepmeat, 1993-2003 ........... 213 B.13. Percentage PSEs, producer and reference prices for poultry, 1993-2003 ................. 213 B.14. Percentage PSEs, producer and reference prices for milk, 1993-2003 ...................... 214 B.15. Percentage PSEs, producer and reference prices for eggs, 1993-2003 ....................... 214 8 OECD REVIEW OF AGRICULTURAL POLICIES – CHINA – ISBN 92-64-01260-5 – © OECD 2005 ISBN 92-64-01260-5 OECD Review of Agricultural Policies China © OECD 2005 HighlightsCh apter 1a nd Policy Recommendations D uring the reform period, which started in 1978, China made huge progress in meeting its objectives: agricultural production rose sharply, rural industries absorbed a large part of farm labour, poverty fell dramatically, and the level and quality of food consumption improved significantly. The commune system was replaced by one where individual families lease land from the collectives, ensuring that almost all rural households have access to land and are, at minimum, food self-sufficient. Currently, China has about 200million farm households with an average land allocation of just 0.65ha. Limited arable land and a large rural labour force mean that, in general, China tends to have a comparative advantage in the production of labour intensive crops, such as fruits and vegetables, and a disadvantage in the production of land intensive crops, such as grains and oilseeds. One of the most striking features of China’s development in the reform period has been a large and growing income disparity between the rural and urban populations. This is largely due to limited factor mobility, especially of labour and capital. Surplus farm labour and low labour productivity have resulted in low agricultural incomes and hidden unemployment in rural areas. The rural-urban gap in living standards is further accentuated by differences in access to education, health care and other social services. The level of support to agriculture from policies fluctuated at low levels through the 1990s, rising to 8% in 2003, still well below the OECD average of 30%. Support levels are highest for import-competing commodities such as sugar and milk, but also for exportable maize. Grain markets remain distorted, mostly due to state trading which drives a wedge between domestic and world prices. The Total Support Estimate(TSE) is relatively high at 3.7% of GDP, reflecting though large expenditure on general services, in particular investments in agricultural infrastructure to improve productivity. In line with the improving economic situation and sectoral performance, government priorities have shifted from increasing production, especially of food grains, to rural income support and recently to environmental concerns. In the medium term, the main challenges for China’s policy makers include closing the large income gap between rural and urban populations; integrating small-scale farmers, who are dominant, into markets; stimulating internal reallocation of resources to create more efficient farm structures; reducing the negative impacts of increasing agricultural production on the environment; improving the competitiveness of agricultural and food products on domestic and international markets; and improving the governance of institutions in designing and implementing agricultural policies. OECD REVIEW OF AGRICULTURAL POLICIES – CHINA – ISBN 92-64-01260-5 – © OECD 2005 9